The Day Ahead: An Odd Shrug-Off

It's another day, and another session in the green for the major indices. Whatever. No sense in beating a dead horse; the market is going to do what it's going to do until it doesn't feel like doing it any longer. So, rather than spew useless trash in the hopes of riding a short down 0.1% into a super mini bear raid, let's keep things productive.

Today we'll focus on the state of the U.S. consumer following a weirdly positive reaction to Wal-Mart's (WMT) "EmailGate." I have taken a break from the retail sector in the past few months, finding it much more mentally stimulating to wear makeup and extol the virtues of Microsoft (MSFT). But, given my years of training in this group, I will swoop into action.

The Chat with Imaginary Consumers (and Mr. Market)

● Market perceptions say that Wal-Mart's sales lapse is just that until tax refunds find their way into the bank accounts of consumers. As a result, the initial fiscal year guidance from Wal-Mart may be conservative (I am personally expecting it to be in-line to slightly below consensus on the low end.)

● Another factor the market is considering is that consumers are sitting on a pretty sizable amount of savings -- the rate was recently 6.5%. When we combine this with impending tax refunds, this could unleash surprising strength in the malls and discounters later on in the first quarter. The more retailers are seen as earnings sandbaggers for the first quarter, the better the market will be positioned ahead of robust earnings beats, driven by unlocked spending power.

● Here's another: Many retailers have become hefty cash-flow generators, even as consumers continue to shop with a lack of consistency. That's been thanks to executive attention, in the past three years, on lowering capital expenditures and inventory as a percentage of total sales while increasing high margin e-commerce sales. When productive investment firms and non-bucket shops have to put client money to work in an impactful manner, you'd best believe they're pitching fundamentally healthy retailers in strategy sessions. The kicker is that these folks are probably working these stocks through models that rationalize interesting premiums vs. their present valuations.

● Also, apparently, the gas-price increase is an show of consumer resilience. While gas-price-creep is now receiving widespread attention -- and we should expect pockets of consumer-price inflation in this week's report, too -- the consumer has not buckled. You go, consumer.

● Don't rule out retailer-for-retailer transactions -- different from zombie-retailer combos in the spirit of the Office Max (OMX)/Office Depot (ODP). For example, V.F. Corp (VFC) could easily spring into action if it senses that valuations are heading into a sustained period of expansion. The action in retail stocks alone could force the boards of larger-cap names to do deals. In other words, a sense of urgency is being created as we speak.

These, I think, are the basic messages behind the odd love that's being tossed the direction of retail stocks. Obviously I am not one to sit here and suggest backing up the truck here, because there are serious concerns within households that shouldn't be ignored.

In fact, check this out: Want to score a clue as to why dollar-store stocks have been dead money for the past six months? Or are you looking to get mentally grounded amid a mega rally? Look no further than the chart below, which compares food stamps (in red) with the U-6 unemployment rate (in blue)

The message here is that, although U-6 declined steadily in 2012, the population has gotten proportionately poorer, as evidenced by the rise in food stamps. In my view, the message is that newly created jobs are subpar -- that is, wages are not strong enough to buy inflationary goods to feed one's family. Note that many goods made for lower-income consumers have been repackaged to include less content, a byproduct of massive inflation that hit consumer products companies in 2011 and 2012.

Are you still inclined to get funky in this sector? Fine. Keep it clean and stick with my top pick for 2013 from the teen-apparel sector, American Eagle Outfitters (AEO).

The company sports these three favorable characteristics in the mix. First, it has the best assortment relative to peers, which matters a great deal when consumers are not shopping the entire mall and consolidating trips. Second, it has very tightly managed inventory levels, compared with peers and in relation to its own sales. Third, the high-margin e-commerce business continues to grow strongly as a percentage of total sales.

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